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Articles by Harry

Harry Sevier

Director – Private Wealth

5 April 2022

Banks are rarely the first port of call in a responsible investor’s portfolio. The preference has been to allocate capital to companies directly involved in climate risk mitigation – electric vehicle manufacturers or renewable technology businesses. But financial services have a pivotal part to play in the transition to Net Zero and investor engagement is critical in determining how banks stand up to the climate challenge.

Banks were at the epicentre of the global financial crisis (GFC). Poor governance and excessive risk-taking were exposed in the wake of the crisis and shareholders fled in their droves. Post-2008, an ultra-low interest rate environment coupled with significant regulatory change has put pressure on profit margins across the sector. Accordingly, investors have been reluctant to reallocate to the banks and valuations remain a long way from pre-crisis levels.

At Ruffer, we’ve been more positive on the outlook for banks. Attractively priced relative to the wider markets and with governance and balance sheets now much improved, banks in developed markets offer a way to benefit from an environment of recovering economic growth, rising inflation and a rapid adjustment in interest rates. Over the last eighteen months, the sector has performed well as this scenario has unfolded, with strong earnings growth and significant market outperformance in 2021.

There is another (perhaps surprising) element in the current attractiveness of banks – their role in the energy transition.

With the right action plan, it is possible these archetypal villains have an opportunity to become heroes in enabling a Net Zero world. Resolving the climate problem relies on access to capital – for research and development, and for investing in the infrastructure required for a new industrial model. The commercial banking sector’s ability to both create and constrain the flow of capital makes it the key arbiter in determining which businesses thrive, survive and fail.

Ambitious and accountable

Almost all of the banking stocks in which Ruffer invest are members of the UN Net Zero Banking Alliance.¹ Signatory banks are expected to commit to decarbonisation through credible action plans, short and long-term emission reduction targets and frequent reporting on progress. Crucially, it requires banks not just to assess their own operations, but those of the businesses they finance and invest in.

This initiative ought to spark much needed progress, as we have witnessed first hand when meeting and investing in small, green infrastructure operators, access to traditional avenues of finance has been tricky to come by. The tide, however, is beginning to turn.

Barclays, for example, is aiming to facilitate over £100bn in green financing by 2030, supporting the transition by providing green loans, green bonds and project finance focused on renewables, energy efficiency and sustainable transport. Barclays has also created an accelerator program which seeks to invest £175m of equity capital by 2025 in innovative sustainability-related start-ups. Their investment has helped businesses develop scalable solutions in areas such as ecological concrete, sustainable fashion and vertical farming (which uses 99% less land and 97% less water than traditional farming, with 300x more yield).² But social and environmental sustainability requires more than innovation, it requires broad-based change across industries and supply chains. In this regard, Barclays has announced a collaboration with one of the leading energy, water and carbon reduction specialists, to help its corporate clients reduce emissions and pivot to more sustainable practices.

Investing in old and new

It’s encouraging to see increasing financial support for innovative new businesses seeking climate solutions, but there are growing calls by climate activists to clamp down on how banks both invest and lend to their existing corporate clients, particularly those with large carbon footprints. The challenge for banks is striking the right balance between supporting start-ups and innovators, whilst not starving incumbents or hard-to-abate sectors of capital. This means intermediating in the gradual transition from current cash flows to more environmentally sustainable technologies and processes with longer-term returns. The infrastructure we so often associate with a greener world: wind turbines, solar panels, battery storage and electric vehicles, are all heavily reliant on a range of industrial businesses, metals, minerals and processes that are not without environmental controversy. Steel, for example, is of paramount importance in the building industry and typically accounts for over 70% of components used in a wind turbine.³

The challenge for banks is striking the right balance between supporting start-ups and innovators, whilst not starving incumbents or hard-to-abate sectors of capital.

This is one example of the dilemmas facing banks, and the complexity of the debate. At the Barclays Annual General Meeting (AGM), we voted against a shareholder resolution that sought to bind Barclays to phase out the provision of financial services to certain businesses and sectors, which we felt was too blunt. This was a difficult decision and not one we took lightly. Following the AGM, we held a meeting with the Chair of the Board, followed by a subsequent meeting at the end of 2021 to dig into further detail around the company’s climate change strategy.

We were encouraged by progress made over the past 12 months and discussed the approach and metrics the company are using to monitor and manage emissions across the range of industries the bank is financing. We stressed the need for absolute emissions targets in future with clear interim pathways outlined to ensure the company is on track to achieve Net Zero emissions by 2050. We have had similar direct discussions over the past year with one of Japan’s largest international banks, MUFG: a summary of the latest engagement can be found in the stewardship section of our Q1 2022 Responsible Investment Report. Another of our investee companies, NatWest, with whom we engage frequently, recently announced plans to halve their global emissions by 2030. Importantly, they have confirmed this will include keeping the door open to support all industries, whilst cutting ties with businesses who fail to demonstrate either credible plans or progress in the transition to Net Zero.

Change at every level

The transition to Net Zero requires widespread changes to public policy, consumer and corporate behaviour. It also depends on significant capital investment to adapt and mitigate the effects of climate change in every industry. Governments and policymakers will play their part, but as they have made clear – much of the heavy lifting will fall to the private sector, with banks acting as a transmission mechanism for change and policy deployment: a route that was particularly effective in response to the pandemic. At Ruffer, we recognise the scale of the challenge ahead and as responsible investors, aim to encourage innovation whilst supporting progress across the spectrum of industries in which we invest, particularly those with large carbon footprints. Through considered investment, engagement and voting, we hope to act as a useful ballast on the journey banks are taking towards a more sustainable world.

Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

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London

Ruffer LLP
80 Victoria Street
London SW1E 5JL

Directions | Map +44 (0)20 7963 8100

Paris

Ruffer S.A.
103 boulevard Haussmann
75008 Paris, France

Directions | Map +33 (0)1 88 45 02 54

New York

Ruffer LLC
300 Park Avenue
New York NY 10022

Directions | Map +1 917 947 3003

Edinburgh

Ruffer LLP
31 Charlotte Square
Edinburgh EH2 4ET

Directions | Map +44 (0)131 202 1602

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